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Class 9: Economic
Globalization 4
Sociology 2
Copyright © 2008 by Evan Schofer
Do not copy or distribute without
• First midterm coming up: May 6
– 1 week!
• Midterm review sheet handed out last class
– Available on course website
• Section this week: Midterm review
• Midterm week: NO SECTION!!! (May 5-May 9)
• Today:
• Video
• More lecture on economic globalization.
Review: Currency Values
• Currency values are affected by:
• 1. Asymmetric trade flows
• Currency drops when a country imports more than it exports
• 2. Asymmetric capital flows
• Currency drops when money flows OUT of a country
• Reasons:
– Fear of political instability
– Fear of economic instability
– A government enacts policies that investors don’t like
» Tax increases, interest rates low compared to others
» Essentially, most Keynesian policies…
• 3. Strategic manipulation of currencies
• But, it takes a lot of money to do this…
Review: Asian Financial Crisis
• How did globalization harm Asian economies?
– 1. Investors pulled out quickly – affecting currencies
• Currency values dropped…
• Imports became expensive
• Companies could no longer pay off loans to foreign banks
– Bankruptcies, unemployment…
– 2. Contagion
• Worries about Thailand spread to other Asian countries
– Self-fulfilling prophecy: fear of problems caused investors to pull
out, creating real problems
• Also, many US companies were invested in Asia (or had
made loans)… Now they were losing money
– Integrated economies mean that crises tend to spread…
Review: Asian Financial Crisis
• Recall Commanding Heights Video:
• In the 1990s, foreign investors moved capital into Asia
• And, foreign banks lent money to Asian companies at very
low interest rates
– Consequence: Rapid economic growth
• Economies “heated up”
• But, capitalism is prone to boom-bust cycles…
• Companies built more factories and housing than needed
– The “boom” ended
• But – global dynamics made the “bust” much worse!
Video: Commanding Heights
• Episode 3, Chapters 11-14
Participation in Globalization
• Question: Given the dangers, why do some
countries want to participate in globalization?
• What are the benefits? And for whom?
• International trade and capital flows can
increase economic growth
• Corporations often stand to benefit most... So business
elites tend to support globalization
• BUT, other groups in society may also benefit
– Investment can create new jobs, employment
– Consumers can have access to wider array of goods, cheaper goods.
Benefits of Trade / Investment
• Without trade, every country must produce all
kinds of goods – cars, coffee, computers, etc.
• Issue: Countries vary in their ability to produce
goods efficiently
• Example: Coffee can be grown in America, but not very
efficiently due to climate
• Example: Computers can be built in Indonesia, but not
very efficiently due to lack of technology, infrastructure
• Result: Without trade, production is less efficient.
Benefits of Trade / Investment
• Economists Adam Smith and David Ricardo
• Trade allows nations to specialize in what they do best…
their comparative advantage…
– See Stiglitz Ch 3, p. 66-67
– Countries can focus on things they produce efficiently
• And, trade for things they don’t produce efficiently
– Result: Greater efficiency & economic growth
• This can produce a win/win situation, where both countries
are better off
– Not counting environmental consequences, etc
– Recall: the straightjacket is “golden”…
Benefits of Trade / Investment
• Also, economists predict that foreign capital will
benefit economic growth
– Recall: Investment is a major ingredient in long-term
economic growth
• Allowing foreigners to invest in a country results in more
overall investment
• Example: If Sony builds a TV factory in a country, the
economy will grow
– And, intangible capital flows can have benefits
• Example: Foreign banks may lend money at lower rates,
giving domestic companies more access to capital
• Lower rates can boost the economy in the short term.
Benefits of Trade / Investment
• Who benefits from global trade/investment?
– 1. Many benefit from greater economic growth
• But, the wealthy usually benefit most in market economies
– 2. Consumers benefit from cheap imports
– 3. Multi-national corporations benefit because they
can move operations to wherever is cheapest
– 4. Highly competitive export-oriented companies
benefit from access to new markets
– And, workers in those industries tend to benefit
– 5. Investors can invest where profits are big
• Ex: CalPERS, LTCM.
Problems of Trade / Investment
• Who might oppose global trade and investment?
– 1. Corporations that will face greater international
• Example: steel & auto industries in the US
– 2. Workers in industries that will face competition
• And labor unions more generally…
– 3. People & governments concerned about:
• Potential for economic crises
• Loss of state autonomy
– Pressure to please foreign capital; loss of domestic ownership
• Difficulty regulating global capitalism
– Environmental problems, sweatshops, etc.
Barriers to Trade / Investment
• Definition: Protectionism = blocking foreign
imports or capital flows
• Opposite: “Liberalization” or “opening up markets”
• Note: different from typical use of “liberal” in US
• Reasons to pursue protectionism:
– 1. Protect domestic companies or industries from
foreign competition
• Prevent bankruptcies, job loss in inefficient industries
– 2. To reduce risk of financial crises.
– 3. Prevent foreign ownership and/or control of the
companies or the economy
• Example: People get nervous when Chinese companies buy
major US oil or computer companies
Barriers to Trade
• Strategies for protectionism
• 1. Tariffs – taxes on imported goods and services
– Example: The US government can impose a $2,000
tax on Japanese cars
• Fewer people will buy Japanese cars, imports will decrease
• 2. Quotas – a government-imposed numeric limit
on imports
– Example: The US may allow only 500,000 Japanese
cars to be imported in any given year.
Barriers to Trade
• Strategies for protectionism (continued)
• 3. “Non-tariff” barriers – A government
regulation that indirectly limits trade or makes it
more expensive
– Example: Strong agricultural subsidies make it
impossible for foreign imports to compete
• NOTE: Subsidies block imports, just like tariffs…
– Example: The US may impose complex agricultural
inspections that delay or discourage imported fruit
• Could be legitimate, or simply a way of stopping imports.
Barriers to Investment
• Strategies for protectionism (continued)
• 4. “Foreign ownership” laws – laws that limit the
ability of foreigners to buy companies
• Example: US government could require owners of
corporations to be US citizens
• 5. “Capital controls” – laws designed to prevent
the rapid withdrawal of capital/investment
• Example: Law requiring invested capital to remain in the
country for one year
– Thus, preventing rapid flows in and out.
Removal of Barriers
• How do trade/capital barriers get removed?
• “Liberalization” or “opening markets”
• Answer: When governments agree to remove
• In direct negotiation with other countries
• Or, via international treaties & organizations
Removal of Barriers
• Bi-lateral negotiations & treaties:
• When two countries negotiate trade & investment barriers
• Ex: The US negotiates with China, haggling over barriers
– “You reduce tariffs on American cars, and we’ll reduce import
quotas on Chinese textiles”
– Note: Barriers can also be raised as coercion
• Example: US threatens to impose quotas on Chinese steel
products, if China doesn’t lower tariff
– China might respond by threatening to raise tariffs on the US
• Escalation of this is called a “trade war.”
Example: Bi-Lateral Trade Negotiations
• South Korea, U.S. May Hold Farm Trade Talks in March
• SEOUL (Reuters) - The United States and its seventh-largest trading
partner began talks on a free trade agreement in June 2006. It would
be the biggest free trade deal for the United States since the North
American Free Trade Agreement was signed in 1992.
• Agriculture has been one of the toughest sectors to negotiate in a free
trade deal between two countries, especially because of intense
opposition from South Korean farmers to market liberalization.
• South Korea's farm ministry repeated Seoul's position that it would
continue to insist on exempting rice under a bilateral free trade deal.
``Rice should be excluded."
• On the issue of resuming U.S. beef imports, the deputy minister said
beef would not be an issue in the meeting and the country would stick
to its stance of importing only boneless beef from the United States.
• South Korea and the United States recently failed to resolve the
dispute over U.S. beef imports, which Washington said could threaten
the free trade pact.
– Exceprt: New York Times 2/21/07
Free Trade Agreements
• Multilateral agreements
• When many countries negotiate together to reduce barriers
• Ex: NAFTA; also negotiations under GATT, WTO
• Quick review of NAFTA consequences:
– Schaeffer, p. 242
» More info in Stiglitz, Ch 3 and elsewhere
– US:
• Slight increase in exports; 90-160,000 added jobs;
• 140,000 textile jobs lost to Mexico
– Canada
• Lost 500,000 jobs
– Given the size of Canada, this was huge
• Canada imports heavily from US; currency devalued.
Free Trade Agreements
• Impact of NAFTA (cont’d)
– Mexico
• 600,000 new textile jobs; offset by other job losses
• Imports from US increase
– This was one factor leading up to the crisis in 1994
– Other losers?
• Organized labor (Unions)
– From commanding heights video:
– Other winners?
• Consumers (who didn’t lose jobs)
• Multi-national corporations
• Possible long-term increase in efficiency, growth.
Problems With Trade Agreements
• Rich/powerful countries have big advantages in
negotiating trade agreements
– See: Stiglitz, Chapter 3
• 1. Rich/powerful countries have a huge advantage
in bi-lateral negotiations…
• Often, those turn out worse for poor countries than large
multilateral agreements
Problems With Trade Agreements
• 2. Rich/powerful countries disproportionately
control the agenda of agreements
– They created them, after all…
– “The United States and Europe have perfected the art of arguing for
free trade, while simultaneously working for trade agreements that
protect themselves against imports from developing countries.” p. 78.
• Topics addressed by FTAs benefit rich countries
– Ex: focus has been on removing barriers for high-value goods &
investment, not farm products or low-tech stuff
• And, righ countries are savvy at using dispute resolution
– They have lots of lawyers, using technicalities to block imports.
Problems With Trade Agreements
• 3. Government trade negotiators are often
influenced by powerful groups
• Rather than negotiating for terms that will benefit everyone in
a country, negotiators may cater to big corporations
• Example: Suppose Guatemala is negotiating over a tariff that
limits big business, but protects jobs?
– Companies may push the government to get rid of the tariff, even if
many workers will be harmed…
Free Trade Agreements
• Issue: Trade and investment liberalization has
increased substantially in the last few decades
• As states moved from Keynesianism to free markets, they
also freed up global markets
• Some political groups have opposed this trend
• Ex: Seattle protestors; many labor unions; governments in
some countries
• We’ll talk about this more after the midterm…